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Microeconomics Simulations

Perkins

Microeconomics Simulations

Memo

To: My Business Partner

From: [Insert your name]

Date: [Insert date]

Re: Microeconomics Simulations

Introduction

This memorandum report identifies and explains key microeconomic principles using a set of simulation games. The outcome of these games illustrates how microeconomic principles can be applied within real-life situations to help us make better business decisions. This report is a summary of the simulations I played and their results, which include the key takeaways and their significance, for your review and reference. It is divided into the following sections:

  1. Comparative Advantage
  2. Competitive Markets and Externalities
  3. Production, Entry, and Exit
  4. Market Structures (including the Price Discrimination and Cournot simulations)
  5. Conclusions
  6. References

Competitive Markets and Externalities

Fig. 1

Fig.2

Government Tools

One tool that the government can employ to correct market failure is command and control policies. Here, an externality may be necessary, or certain behaviors are forbidden (Viscusi et al., 2018). For instance, it would be illegal to dispose of hazardous chemicals in the water supply. In the mentioned instance, society’s external costs far surpass the benefit of the polluter. Hence, the government puts into place an order-and-control strategy that bans the illegal activities mentioned above.

The government can further utilize restorative subsidies and taxes. The government can demand taxes on schemes with a negative facade in this case. Besides, the government can subsidize activities with positive externalities (Viscusi et al., 2018). For example, consider two factories, a steel mill company, and a paper mill company. Each of the two companies disposes more than 600 tons of sludge into the river annually. On the other hand, the EPA needs to lower the pollution rate. Consequently, the EPA examines two options: regulation, whereby the EPA can order every company to lessen the glop to 400 tons yearly, or restorative tax, where the EPA can impose a surcharge of 60,000 dollars on every factory or each ton of gunk disposed of.

Furthermore, the government can use tradable pollution permits. These allow companies to be restricted from using some processes that emit a specific amount of pollution (Mankiew, 2021). The sanction would only permit a company to cast a particular pollution amount with penalties attached. For instance, if the EPA does not want more than 800 tons of sludge disposed into the river, however, since the EPA cannot comprehend the demand curve, it will not know the amount of tax that would hit the set target. In the above instance, the EPA can sell off 800 pollution sanctions. If effective, the selloff price would incur the corrective tax necessary to achieve EPA’s target. On the other side, assume the EPA is aware that the external pollution cost is 50,000 dollars per ton of glop but is unsure of the amount the glop factories would emit at that cost. Here, the EPA could reach an efficient result by imposing a corrective tax of 50,000 dollars per ton and leaving the market to determine the pollution quantity.

Supply and Demand Equilibrium

If the market lacks government intervention, it will certainly go into equilibrium. The above is the case in which supply and demand will be equal; thus, all the sellers are ready to sell at a certain price, and the buyers are willing to buy at the same cost. Therefore, all get what they desire. Although all the sellers and buyers in a market are only concerned about their well-being, together, an invisible equilibrium hand guides them, capitalizing on the total buyers’ and sellers’ benefits (Mankiew, 2021). The above is also referred to in the simulation game, where one can obtain more deals from sellers willing to manufacture them at the minimum prices. The robot dogs’ contribution to the buyers is equal, as analyzed by the buyers’ readiness to pay. However, one wants to make a lot of money when selling robot dogs. The government runs and puts up directives. Every trade in any nation should align with the rules established by the governments and their agencies. The government then collects revenue tax from its work. Further, the government interferes with the demand and supply equilibrium through price floors, price ceilings, and taxing goods.

Consumer/Producer Surplus

The government establishes price controls such as floors and ceilings to sustain prices at a particular point. A price vault is a maximum check to know how high a price can go, and the cost will not increase beyond the set point. With price ceilings, goods shortages arise. Sellers must slow the sales and divide the goods among several prospective buyers.

On the other hand, a price floor is the absolute minimum least for a price. Price floors could produce too many goods, leading to a surplus. The above is undesirable since there are a lot of interests and inadequate buyers. People usually react to incentives and desire to incur as much profit as possible for producing goods. Therefore, they strive to keep their prices high. However, the above can push away consumers if the fees are too high, leading to an unwanted surplus. In such a case, the government may impose a price vault. The ceiling serves as a permanent constraint on the market (Browning & Zupan, 2020). Supply and demand forces are inclined to shift prices towards prices of equilibrium. However, when the costs of the market reach the ceiling, they will not elevate any further. Therefore, the fees of the market equal the established price ceiling. Consequently, the quality of goods demanded may surpass the supplied quantity.

References

Browning, E. K., & Zupan, M. A. (2020). Microeconomics: Theory and applications. John Wiley & Sons.

Mankiw, N. G. (2020). Principles of economics. Cengage Learning.

Viscusi, W. K., Harrington Jr, J. E., & Sappington, D. E. (2018). Economics of regulation and antitrust. MIT Press.

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Question 

This simulation checkpoint assignment directly supports your success on the course project. You will play the simulation games, create the image file of your simulation report, and discuss learned concepts and experiences in your submission.

Microeconomics Simulations

Directions

For this assignment, first, play the simulation games Externalities Without Policy Interventions and Externalities With Policy Interventions in the MindTap environment. Then, you will report your experiences playing those games. Your work in this assignment will directly support your success on the course project.

In your submission, remember to include the images of your simulation reports. See the How to Submit a Simulation Report Image document for more information. Then, reflect on the decisions you made in the simulation and address the following government intervention options in your submission:

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